CANADA FX DEBT-C$ reaches highest since Jan. 9, helped by stocks

TORONTO, April 30 (Reuters) - The Canadian dollar touched its highest level in nearly four months on Thursday as market sentiment improved on optimism the global economy may be starting to stabilize.

The appetite for risk, along with firmer oil prices, helped the domestic currency break through a key technical level, while equity markets managed to remain relatively stable throughout the day, supporting the currency on the upside.

Canada’s currency rallied overnight to as high as C$1.1864 to the U.S. dollar, or 84.29 U.S. cents, its highest level since Jan. 9.

“It’s still the equity market theme that is helping the currency here,” said George Davis, chief technical strategist at RBC Capital Markets. “It has to do more with general sentiment and general psychology.

“Even though the markets weren’t able to hold on to their gains throughout the day we certainly haven’t seen any type of significant or sharp selloff.”

The broader theme of improved risk appetite kept the currency higher even as data on Thursday showed the seventh straight monthly fall in GDP.

Manufacturing output in Canada rose in February for the first time since July, boosted by a recovery in autos and limiting the fall in gross domestic product to 0.1 percent, Statistics Canada said on Thursday. [ID:nN29434455]

“There was a fairly muted reaction when the numbers came out,” said Davis. Nothing overly significant. The headline number itself was pretty much as expected and the prior number was unrevised so there weren’t really any surprises there.”

The currency finished at C$1.1930 to the U.S. dollar, or 83.82 U.S. cents, up from C$1.2030 to the U.S. dollar, or 83.13 U.S. cents, at Wednesday’s close.

Davis said the domestic currency’s rise was a continuation of Wednesday’s equity rally, helped in part by comments from the Federal Reserve, which said the pace of economic deterioration in the United States appeared to be easing.

BOND PRICES LARGELY FLAT

Domestic bond prices were mostly weaker across the curve, mirroring losses in U.S. Treasuries.

As well, Bank of Canada Governor Mark Carney’s testimony to a parliamentary committee on Wednesday reminded the market of the central bank’s decision to avoid using unconventional policy measures, analysts said.

“There is lingering pressure on prices coming from people unwinding positions that were built up in anticipation of Bank of Canada quantitative easing,” said Michael Gregory, senior economist at BMO Capital Markets.

The two-year Canada bond was flat at C$100.55 to yield 0.983 percent, while the 10-year sagged 17 Canadian cents to C$105.50 to yield 3.110 percent.

The 30-year bond pulled back 25 Canadian cents at C$119.80 to yield 3.841 percent. In the United States, the 30-year Treasury yielded 4.0353 percent.

The performance of Canadian bonds was mixed versus U.S. Treasuries, but the Canadian 10-year bond outperformed. The 10-year yield was 2.8 basis points below its U.S. counterpart, compared with about 1.6 basis points on Wednesday. (Reporting by Jennifer Kwan and Frank Pingue; Editing by Jeffrey Hodgson)